Industry Insight: Energy's Money Machine

Bargaining power of suppliers: For integrated oil companies, suppliers have little say in the matter. The Earth supplies the primary input, and it's not very demanding in regard to compensation.

Labor is probably the most important and volatile input to be considered by investors. However, oil and gas companies lack the sort of union issues that have plagued the auto industry for years.

Threat of new entrants: Under usual circumstances, highly profitable industries will draw new competitors seeking to achieve similar earnings. But the threat of new entrants to the oil and gas sector is extremely low due to huge capital requirements. From oil fields to drilling apparatus to infrastructure and a disruption to networks, nothing is cheap.

While some small drilling operations may pop up from time to time, large integrated oil and gas companies are an exclusive club, leaving profits for a few players.

The bottom line is that oil and gas companies enjoy an enormous amount of leverage on consumers, leading to outsized profits. Those that can produce the most oil for the lowest cost will be the most profitable. When factoring in forward-looking management choices, Chevron and BP appear to be the strongest "buys" in the category due to their advances in alternative energy, which should position them better once that transition becomes a reality.